Frequently Asked Questions (FAQs) about IPOs

Frequently Asked Questions (FAQs) about IPOs

IPOs have always been popular and bring a lot of excitement to the markets. We have a number of IPOs lined up for the Indian markets this year. It almost seems as if we’re making up for all the lost time. In order to help investors in their understanding of IPOs, we have compiled a list of Frequently Asked Questions (FAQs) about IPOS’s:

1. What is an IPO?

An Initial Public Offer refers to the process where a company offers its shares to the public. In an IPO, the company offers shares to investors in exchange for capital. This is one of the means through which the company raises funds. Any company that fulfills the requirements of the SEBI can go public.

2. Do Companies list on stock exchanges without an IPO?

Yes. Companies can get listed on an exchange without an IPO as long as they meet the conditions set by SEBI.

3. What are the opening and closing dates?

It is between these dates that investors are allowed to apply for the IPO.

4. What is the price band?

This refers to the lower and upper limit of the share price within which the company will offer its shares to the public. The investors are allowed to bid equal to or in between these lower and upper limits.

5. What is ‘Market Lot Size’ (Minimum and Maximum)?

In an IPO the total shares offered to the public is divided into lots. In an IPO the investors are not allowed to purchase shares of any quantity. They have to do it in lots. In addition, a minimum and maximum lot size is set beforehand. For eg. say Company A going public sets a lot size of 10 shares for each lot with a minimum and maximum lot purchase set at 1 and 10 respectively. This basically means that the minimum number of shares an investor can purchase is 10 and the maximum a 100. If an investor wants 65 shares he will not be able to do so. But he can purchase 6 lots which is the closest denomination. This is one of most Frequently Asked Questions (FAQs) about IPOs

6. Does applying for an IPO guarantee investors a certain amount of shares?

  No. Applying for shares does not guarantee allotment. Applying for shares means that you are bidding for the shares. The allotment depends on the number of bids received and the price at which these bids are made. 

7. What is the life cycle of IPO?

The IPO process includes the following steps

  1. The company approaches and appoints investment banks to act as the lead managers and registrar to the IPO issue. They then register with the SEC
  2. The lead managers prepare a draft prospectus for the IPO and file the prospectus with the SEBI.
  3. The SEBI reviews and approves the prospectus. If any changes are required they revert back to the company for the changes to be made.
  4. The lead managers bring attention to the IPO.
  5. The company along with the lead managers price the IPO and release dates for the issue.
  6. The IPO is opened for public bidding.
  7. Registrar processes IPO applications allocated them to respective DEMAT accounts and processes refunds.
  8. Shares are listed on the stock exchange.

8. What are the primary & secondary markets?

The primary market is the part of the capital market where securities are first created and sold to investors. This market deals with IPO’s. 

Secondary markets refer to the part of the capital market where they buy and sell securities which they already own. Shares can only be sold and bought here-after the listing of the company opting for IPO takes place.

9. What is Follow on public offering (FPO)?

A Follow on Public Offering(FPO) refers to when the company opts to offer shares to the public when it has already issued shares in an IPO in the past. 

10. Who decides the date of the issue?

The most appropriate offering dates are decided by the company after their prospectus is approved by SEBI.

11. How many days will an IPO remain open for the public?

An IPO remains open for at least 3 working days, but not more than 10 working days.

12. What is the listing date?

IPO listing refers to the date when the shares will begin trading at the stock exchanges.

13. What is the role of the registrar of an IPO?

The registrar is appointed by the company. They are responsible for processing IPO applications and allocating the shares to the applicants. They also process refunds or transfer of shares to Demat accounts of IPO applicants. All this is done in accordance with SEBI guidelines.

14. What is the role of Lead Managers in an IPO?

These lead managers or underwriters are independent financial institutions appointed by the company. They are responsible for coordinating all the activities surrounding the issue. The activities include getting attention towards the IPO, creating draft documents, getting the draft approved by the SEBI, etc.

15. What is the difference between the Book Building Issue and the Fixed Price Issue?

These are methods through which the issue price is set in an IPO

In the Fixed Price Issue, the company fixes a price at which the shares are offered to the investors. 

In the Book Building issue, the price band is set by the company. The investors then place their bids equal to or above the floor of the price. These bids are then sent to the lead manager who enters the bids in the book. This method helps in efficiently setting the price.

16. What is the difference between Floor Price and Cut-Off Price?

The floor price is the minimum price at which bids can be made.

The cut-off price is the offer price that is finalized by the company and the lead manager after receiving the bids. This can be any price in between the price band.

17. What is the difference between RII, NII, QIB, and Anchor Investor?

RII: Retail Institutional Investor refers to investors who apply for stocks below the value of Rs.200,000.

NII: Non-Institutional Investors refer to Investors who apply for more than Rs 2 lakhs worth of IPO shares.

QIB: SEBI has defined a Qualified Institutional Buyer as Institutional investors who are generally perceived to possess the expertise and the financial muscle to evaluate and invest in the capital markets. These include Public financial institutions, commercial banks, mutual funds, and Foreign Portfolio Investors, etc.

Anchor Investors: They are QIB’s who are the first investors in an IPO and can attract investors to the IPO. They invest an amount of Rs. 10 crores or more.

18. Is it mandatory to have a PAN number to apply in an IPO?

Yes. SEBI has made it mandatory since 2006.

19. What information should I keep after I submit the IPO application form?

-Application Number

-Copy of Payment

-Copy of Application form.

20. IPO’s are less riskier than directly investing in the stock market?

IPO’s come with their own set of risks:

– There is limited data available from the company for individual investors.

– IPO’s generally take place during bullish markets where investors are optimistic.

– It is hard to predict the price movement for listing gains. Flipping IPO’s is common if the shares make a profit on a listing day.

– Retail investors may not even be allotted shares if the IPO is oversubscribed.

21. Can I apply in an IPO through multiple applications of the same name?

No. Applying multiple times does not increase the chances of allocation. In fact, if the IPO receives multiple applications with the same PAN number then all your applications will be rejected. 

22. What is the Basis of Allocation or Basis of Allotment?

In the case where bids do not exceed the offering, the investors will be allotted shares as long as they have provided accurate and appropriate applications. If the IPO is oversubscribed then the shares may be allotted on a pro-rata basis or through a draw of lots. 

23. Can I revise or cancel my IPO application?

Yes. An investor can cancel his IPO application. 

An investor may also change his bid using. This can be done using the form for changing /revising bids that comes along with the application form. 

This however must be done before the IPO issue is closed.

24. Where do I get an IPO application form?

An investor can download the online ASBA form provided by the advisories or they can download it from the BSE/NSE website. These forms are made available 2 days before the IPO.

25. Can investors sell the stock allotted to them in an IPO before the stock gets listed?

No. An investor can place a sell order during the pre-opening time and sell when the IPO trading starts at 10 am on listing day.

26. What are the tax implications of selling IPO allocated shares on listing day?

If an investor sells his shares on listing day or within one year of listing he will be subject to pay ordinary income tax on the gains. Beneficial capital gains tax rates are applicable only in case the shares are sold after one year in the case of IPO. This is the most common concern amongst traders and investors when we talk about Frequently Asked Questions (FAQs) about IPOs

27. How many days issue takes to list in the market?

It takes 6 days for a stock to get listed on an exchange after the IPO is closed. This period is expected to be reduced to 3 days by market regulators in the coming future.

28. How is the listing price calculated?

The listing price is calculated based on the market forces of demand and supply for the company shares.

To Conclude…

We hope that the list above answers most of the questions which most of the investors have. That’s it from us in this write up about Frequently Asked Questions (FAQs) about IPOs. We will see you in our next meeting.

How to choose an IPO for investing cover

How to Choose an IPO for Investing? Key Things to Know!

Tips to Choose an IPO for Investing: Do you really want to take part in an IPO but do not know what to look for before investing? Don’t worry we’ve got you covered. In this article, we discuss the important aspects to watch out for before investing in a company. Here, we’ll discuss the key things to look to choose an IPO for investing. Let’s get started. 

What is an IPO? 

What is an IPO? 

An IPO is a process through which a private company can raise funds through the stock market, transforming itself into a public company whose shares are traded in a stock exchange.

This is a preferred means of raising funds as the company is not obligated to pay interest as in the case of loans, The company however is owned by the shareholders post the IPO. There can be a number of reasons why any company offer an IPO. Here are a few of the top ones:

  1. To raise capital (financial benefit)
  2. For funding a new project or expansion plan of the company
  3. For carrying out new research and development works
  4. To fund capital expenditures
  5. To pay off the existing debts or reduce the debt burden
  6. For a new acquisition
  7. To create public awareness of the company
  8. For the group of initial investors desiring to exit the company by selling their stakes to the public.

In addition, IPOs generate lots of publicity for the company and hence helps in creating market exposure, indirect exposure, and brand equity.


Eligibility Criteria for an IPO: Requirements for a company to Go Public!

Tips to Choose an IPO for Investing – Things to look

At the end of the day taking part in an IPO is just another form of investment. The problem however arises as companies that go for IPO’s are relatively new and there is not a lot of information available about them. In comparison companies that are public have reports, company news, and expert analysis readily available on the internet.

In order to avoid investors falling prey to companies with weak financials, the regulatory authorities have made it compulsory for companies to issue a Red Herring Prospectus (RHP). This prospectus is a summary of the company and provides important details like financial statements, revenue, earnings, risks, etc of the company. It is very important that the prospectus is read carefully before investing 

Following are some important factors to look at before investing in an IPO:

— Growth Prospects and financial strength

The value of the company depends heavily on its growth rate so far and the prospective growth rate it can generate in the future. The prospectus gives a track record of its growth in various aspects and annual reports throughout the years. This will help in predicting what the company may achieve in the coming years and if it is worth investing in.

— Promoter holdings

The prospectus also includes information on whether the company is freshly issuing shares or are they an offer for sale which are shares of existing promoters. According to the law, promoters are required to maintain a minimum holding of 20% post issue. But if the promoters are selling a major portion of their business this could be a red flag. Instead, if the promoters decide to hold a significant portion of shares post the issue then it is a sign that they believe in the future of the company and want to be a part of it. Instead of using the IPO as an escape.

— Allocation of funds raised through IPO

The prospectus also gives us information on what purpose the money raised through an IPO will be used for. A good sign would be the company allocating the funds for future growth. On the other hand, if the main purpose of the IPO is to pay off existing debt or buy out promoters then these should be considered as red flags.

— Comparison with competitors

In order to assess the company’s performance, one should also compare the performance of the company with that of its peers in the same industry. The IPO price also may be compared to other companies in the same industry. Based on its performance and price with its competitors, one can assess it is a company is overvalued or worth investing in.

— Beware of the oversubscription trap

It is also very important for investors to rely on their research and not on market hype. Often IPO’s are oversubscribed. An investor must not get swayed by this information as subscriptions often replicate market trends. This means that there are greater chances of IPO’s being oversubscribed in bullish markets than in bearish. Companies being aware of this are looking for the highest valuations to make use of this.  

IPO Terms to Know Before Investing in an IPO

Following are some important terms that provide vital information for investing in the stock market. Understanding these terms are crucial to choose an IPO and make a sound IPO investment decision:

1. Size: The size generally refers to the offering size. This is the number of shares offered in the IPO multiplied by the price per share. This shows the amount the company is attempting to raise from the IPO. 

2. Fresh Issue: This refers to the new equity shares issued to the public. 

3. OFS: Offer for Sale refers to the dilution of existing promoters’ stake which is given to the shareholders. Here no new shares are issued.

4. Opening/Closing Date: It is between these dates that investors are allowed to apply for the IPO.

5. Price Band: This refers to the lower and upper limit of the share price within which the company will offer its shares to the public.

6 Lot Size: In an IPO the total shares offered to the public is divided into lots. In an IPO the investors are not allowed to purchase shares of any quantity. They have to do it in lots. In addition, a minimum and maximum lot size is set beforehand.

For eg. say Company A going public sets a lot size of 10 shares for each lot with a minimum and maximum lot purchase set at 1 and 10 respectively. This basically means that the minimum number of shares an investor can purchase is 10 and the maximum a 100. If an investor wants 65 shares he will not be able to do so. But he can purchase 6 lots which is the closest denomination.

7. Face Value: The face value refers to the original cost of the shares.


IRFC IPO Review 2021 – IPO Offer Price, Dates & Details!

Closing Thoughts

In this article, we discussed a few of the key aspects to look to choose an IPO for investing. IPO’s are considered to be riskier than other forms of investment as the information available is limited. But the risk can be limited to a great extent if one makes a thorough study of its prospectus. At the same time watching out for the red flags mentioned above. Happy Investing!